You’ve got to think that Trump will be reassessing his hardline stance on trade over the weekend, assuming he’s not too preoccupied with ‘Alex’ Baldwin.
Then again, you would have figured Trump might have adopted a softer stance on Friday (as opposed to tweeting about “winning” trade wars in his pajamas) given the blowback he got yesterday and the rather precipitous decline we witnessed on his beloved Dow, which is now down something like 1,600 points from Tuesday morning when Jerome Powell starting talking about how the outlook for inflation is improving.
Speaking of inflation, one of the key questions in all of this is what the tariffs will mean in an environment where everyone is already laser focused on the prospect for rising price pressures to force the Fed to hike more rapidly than the market anticipates (read: more rapidly than the market “wants”). Here’s Bloomberg’s Michael Regan (you should follow him on Twitter):
The stock market clearly doesn’t like the idea of trade wars, but the key question to sort out is: why? Is it the notion that tariffs will goose inflation, leading to faster Fed rate hikes and higher yields? Or is it that higher costs for steel and aluminum, and potential retaliatory measures from trading partners, will force everyone to take an eraser to those lofty profit forecasts? Ian Lyngen and Aaron Kohli of BMO vote for the latter… “Given the recent experience of producers passing along elevated prices to end users (note core-PCE is still at just +1.5 YoY), we’re more concerned about the potential for profit-margin erosion rather than runaway CPI.”
Fair enough, but the inflation question is still an issue and Trump troll par excellence Ted Lieu took to his own hilarious Twitter account this morning to weigh in on just that:
I predict that when consumer prices increase; inflation spikes; and other countries start retaliating, @realDonaldTrump will say "nobody knew that trade could be so complicated." #FridayFeeling https://t.co/xyGoztx6kR
— Ted Lieu (@tedlieu) March 2, 2018
There you go. And while there’s an argument to be made that the Fed would look through inflation created by “very stable geniuses”, this is still going to be a hot-button issue going forward.
In light of that, you might be interested in the following out today from Moody’s which serves not only as a cautionary note on the inflation front, but also as a good recap of recent events…
Tariffs Warn of Even Faster Price Inflation and Slower Growth
February was a stormy month for financial markets. Worse yet, March got off to a horrible start in response to President Trump’s intention to impose import tariffs of 10% on aluminum and 25% on steel despite how costlier aluminum and steel will diminish the global competitiveness of those U.S. manufacturers using these materials. Remember, after having incurred back-to-back monthly setbacks in January and February, auto sales were expected to decline in 2018 prior to the statement on tariffs.
Markets question the need for such tariffs given how employment opportunities have increased considerably over the past year. In addition, such tariffs will add to already elevated worries surrounding price inflation that stem from the considerable upward pressure put on product prices by higher rates of resource utilization. Finally, March 1’s tanking of equity markets and jump by the VIX index threaten to lift the cost of financial capital and diminish the confidence of both businesses and consumers.
It’s worth noting how earlier and prospective protectionist measures have lifted the price of steel by 20.1% and lumber futures contracts by 13.5% since year-end 2017. By contrast, Moody’s industrial metals price index, which excludes both steel and lumber, rose by a smaller 3.4%. In fact, one of the index’s six constituents—the spot price of copper—was recently down by 5.2% for the year to date.
Do not be surprised if a very adverse reaction by financial markets forces the administration to reconsider the tariff proposals.
Outlook Was Worsening Before Proposed Tariffs
During February, Treasury bond yields soared higher in response to expectation of a much increased supply of tradable U.S. government debt and January’s uncomfortably high readings on consumer price inflation both with and excluding food and energy prices. The early February release of the January employment report stoked fears of a wage-driven upturn by price inflation that might menace markets indefinitely.
Notwithstanding good news on employment and personal income, real consumer spending fell by 0.1% from December to January. In addition, the available results on February’s unit sales of cars and light trucks suggest that seasonally adjusted sales fell for a second straight month to their slowest pace since August 2017. Thus, February’s real consumer spending might do well to post a slight 0.1% monthly rise.
January also incurred unexpected monthly setbacks for unit sales of new and existing homes. Combining higher-than-expected mortgage yields and financial market volatility with the less favorable tax treatment of home ownership warns of fewer-than-expected home sales during 2018’s first half.
And not to be forgotten is January’s unexpected second consecutive monthly drop by new orders for nondefense capital goods. Both businesses and investors are likely to lose their appetite for risk. Thus, the still exceptionally thin yield spreads of corporate bonds are likely to widen materially.